All,
We are coming up on very interesting times in the commodities and currency markets. There are structural changes at play that will change how things are valued and traded around the world for the remainder of this cycle and into the foreseeable future.
If we look at our industry from a macro perspective and then drill down on how those macro changes will affect our industry I think you will see that agriculture is about to be revalued or remonetized going forward especially in this inflationary environment. How many of you ran out of high priced fertilizer? NO ONE DID. IF you were told there was none available your supplier was full of it. How many were told they could not price fertilizer last fall? If you were it was because your supplier wanted to appreciate his inventory before selling it. MAC always has a price for your inputs….we will not hold as prices go up.
There was plenty of everything available this spring…….maybeone or two chemicals were tight but not impossible to find.
Geopolitical
The world changed on February 24th. Very few people really believed that Russia would cross the line into Ukraine. I know our government was preaching just that back in December/January but who believes anything a politician says anymore? Maybe they should re-read the fable about a boy crying wolf….
Either way Russia flipped the map February 24th and countries/currencies/trade flows have been re-aligning ever since. Getting grain out of Ukraine is a shell game and not many insurance companies will even insure your boat if you travel into the black sea to get loaded. Getting fertilizer from Russia carries a dark cloud of tariffs and price risk if you dare.
Trade wars are traditionally economic in nature but now we have a full-fledged kinetic war in Ukraine raging. I am definitely not condoning what Russia did/is doing but we all have to adjust our compass based on their geopolitical moves. A major event aside from the hot war was the change in policy on payment terms for their natural resources. No longer will they accept Euro’s or Dollars for energy…they now require payment in Rubles or gold. First, ask yourself why? I believe it is not just a tactic brought on by war…It is a reaction to two things. 1.) they know that the long term purchasing power of the dollar has been severely reduced over the past years and it will decline even more as we print to pay for our obligations to the baby boomers(think healthcare/social security). 2.) In a first ever move the USA and Europe froze the foreign currency holdings of Russia held at US and European banks. So, no longer is holding US and European treasuries risk free…..game changer!
The Ruble has moved up against the Dollar and Euro. It is therefore costing us(mostly Europe) more for their resources……in a competitive world we would just go to another supplier but in a woke world where we want cheap energy produced as far away from our backyard as possible, and at the same time we have restricted the expansion of domestic energy production. You have politicians selling out on Wind and Solar as a virtue signal to the loudest fractions of their voter base. What ever happened to DRILL BABY DRILL??
POTASH
Aside from energy….Russian potash is now not allowed into the US. The tariffs on potash have been beneficial to the Canadian producers(Nutrien/Mosaic/K + S) to the detriment of north American farmers. As the world bifurcates into two supply chains the production from North American suppliers will have to increase to offset the loss of the Russian and Belarussian supplies. Here is the chart for CORN/POTASH ratio since 2016. It will take a $625 /ton potash price to get this chart to look like it even resembles a fair deal. Will Mosaic/Nutrien and K+S compromise with their price to offer this transaction? I doubt it…I think they are coming off a great year and they will look to press their advantage. My guess they will come out with a summer fill offer in the 700-750 range….. We shall see…..Either way right now is not a good time to buy potash.
NITROGEN
As Natural gas prices remain elevated in Europe we will see North American nitrogen producers looking to push exports. (How do you like that…they ask for tariff protection last year and this year they exported tons!…do they still need tariff protection? Feels scammy to me) WE SHOULD IMMEDIATELY DROP ALL NON RUSSIAN TARIFFS!!
The big question is will Putin heat Europe at current prices or will he squeeze them higher?
Rumor has it that Russian UREA came into Toledo and then was exported back into Canada. Canada put a 35% tariff on urea from Russia so traders just worked the paper to make it look like it was North American….lol. Politicians are so clueless!
Urea needs to be $625/ton to get my charts into the yellow range to be considered a neutral deal given current corn 2023 prices. That mean North American producers would have to drop their shorts for another $50-$100/ton to strike that ratio. Will they? I am not sure yet. They are arguing about that with themselves right at this very moment…….
I will be going to the South West Fertilizer Conference in Nashville in two weeks and I can’t wait to hear all their(producers) bullish reasons to prop up prices. My thinking is we(USA) are the “Sams Club Costco” buyers of the world. We get the best price for the biggest volume and we pay in CASH! But….I do not believe the American farmer will just blindly buy with out a profitable corn sale to back the input price.
Here is what urea chart looks like if urea is $625/ton. Right nowit is closer to $700/ton so we need to come down a lot for urea to be considered a “GOOD” deal.
28% Nitrogen will need to be $425/ton to get the my charts into the yellow zone. To get to this ratio the prices needs to drop $100/ton to achieve this level. I am sure CF Industries and Koch Fertilizer are trying to reason how they keep prices up……it will be a game of chicken once again…….let see who blinks first.
Here is what $425/ton for 28% and $5.25 bu 2023 corn would look like today. As you can see we need a much bigger price reset to get to the green “BUY” zone!
Below is a chart I posted about a year ago in one of these newsletters. I argued that Nitrogen prices would come down in the USA because we had been on a long cycle of cheap energyand it pushed increasing domestic production of N at all locations in North America. Not only did price fall since last fall we imported tons to the USA when we were clearly the cheapest value in the world….WHY? Because the Dollar is king! Although we all know the dollar is a sinking ship…it is the slowest sinking ship in the harbor. Everyone wants to get paid in dollars because most debt around the world is dollar denominated……they need OUR dollars to pay THEIR debts. Although Russia and China are trying to “de-dollarize” it will not be a process that will happen overnight.
I believe we are self sufficient in Nitrogen. We will have adequate supplies regardless of what Russia or China does. Prices may remain elevated as long as the corn price justifies it. Will N prices separate from Corn price if energy price go A LOT higher? Very good question, and will be answered I think this winter as heating demand along with inflation may push energy higher.
Phosphates
Phosphates are the poster child for protected markets. Mosaic was the first to receive tariff protection and they have levered higher prices ever since. Here is a chart the requires a $150/ton drop in prices just to get you into the neutral zone!! I don’t think they will do this until the farmers shut down the application of MAP/DAP like they did in the 2009 season and inventories build up. I believe that will happen this fall. Our politicians need to immediately drop all tariffs on Morocco and China for phosphates. You can’t seriously argue that you are trying to bring down inflation while you TAX the base commodity of food! It is ludicrous!
SOAPBOX
Will what is happening to energy also happen to the commodities that we grow? Or in other words will corn, soysand wheat keep up with energy inflation? I don’t think it will. I think owning and producing food will protect you against 90% of the inflationary factors but I don’t think it will keep up with energy until we decide as a nation that the wind does not always blow and the sun does not always shine. We should be securing energy production in every state and in every province of North America. You can directly link the standard of living with the amount of energy produced in a region. Obviously we have to be conscious of being environmentally sustainable but not drilling oil in the USA and importing it from abroad is a net loss on both accounts for sure! I may offend some people here but we are turning into a bunch of crybabies! It is time to buck up….we are in a trade war, a tech war, a currency war, and an energy war and if we don’t start producing things at home again we will be going backwards very soon. The pandemic showed we were swimming naked……its time to sure up our economy and let entrepreneurs run their business without all the BS red tape government crapola. Did I just say that out loud?
BREAKEVEN
So where do we target our input prices for 2023?
Above charts went over where it would “need” to be to be in the neutral but I believe we won’t have that opportunity until at least January. So if you have to buy this fall target these levels this summer:
Potash--750
Map--900
28%--450
Urea—675
There is still money on the table but profitability is being squeezed by and inverted grain market that values today and discounts tomorrow. Below is first look at 2023 breakeven analysis.
Thank you for taking time to get this far thru my newsletter. I hope the charts help you make good purchasing decisions. Remember we are spread managers…if you buy some inputs make sure to lock in the margin by selling a little forward at the same time.
SOMETHING NEW COMING TO MAC!
One exciting thing MAC will be debuting soon is our E-Commerce website. I will be forwarding you all a link in the very near future that will allow you to buy MAC products online and directly shipped to your door. Although we love chatting with you on the phone and in person we are positioning this site to service the next generation of your family if they choose online engagement. We will start out with a few product and then will be continually adding new items. We are really excitedto get this site up and running!
NITROGEN TARGET PRICE SHEETS COMING OUT SOON!
Last and not least we will be sending out 28% Nitrogen price target sheets. As many of you know, when the initial fill price comes out this July there is often only a hour or two to make a decision or miss the opportunity. Phil Tuggle and I will be sending out a worksheet that we will ask you to fill out to prepare for this fast paced initial fill offering. I expect that we will need to have a plan in place no later than July 10 or miss the chance at what are typically the cheapest tons of the season for 28%.
If you would like to discuss a possible plan….give Phil or I a call to be ready!
Thank you for your business this past year and we look forward to earning it in the future.
John